Community Banks: You DO have that competitive advantage Presented by: David W. Furnace CEO June 14, 2016 1
Agenda • Industry backdrop – Community banks vs. big banks • Capitalizing on competitive advantages and monetizing the customer base • Expanding market share 2
Industry Backdrop 3
Total Number of Financial Institutions 4
Annual Return on Assets 5
Top 30 Market Share 6
Loan to Deposit Rates 7
Net Interest Margin
Fee Income 9
Industry • Continued improvements in loan to deposit ratios • Stabilized fee income • Stabilized Net Interest Margins (for community banks) 10
Capitalizing on Competitive Advantages 11
Our contrarian view… • What is your biggest competitive advantage as it relates to core customer growth? • Most community banks response: better customer service. • Our view: better service isn’t an acquisition tool, except in one way: referrals. • Your bigger advantage: you have a very different business model, so don’t follow the bigs … 12
Big Bank Your Bank Perception Locations: Marketing Dollars: Product Offerings: Pricing on Deposits: “Too Big to Fail”: Technology: Customer Culture and Service:
Advantage #1: Capacity 14
A Factory at Capacity… • If you have a factory and you are running full out – 3 shifts, 24/7 – Maximum Production • Then…revenues are slashed by events beyond your control 15
A Factory at Capacity… • It makes sense to consider the following: – Raise prices, knowing you will sell fewer widgets – If sales fall enough, consider axing the 3 rd shift to reduce costs to offset 16
But what about the other factory? • If your factory is operating at 30% capacity and running only one shift (and we have the same fixed costs)… • …and you have very low marginal costs… • Should you raise prices too? • Or should you pick off the business the other guy is shedding and start a second shift? 17
One metric to illustrate The average community bank branch in America opens about 175 retail and business checking accounts per branch per year (3/branch/week) and has about 1,200 checking accounts per branch.
Capacity, Capacity, Capacity Community Banks average Big Banks average 1000-1500 customers 4000-6000 customers per branch per branch 19
Advantage #2: Marginal revenues are many multiples of marginal costs 20
Profitability at the Margin • In general, the notion of a single unprofitable customer (or some segment of unprofitable customers) drives bankers to drink… • But many businesses are made profitable at the margin (i.e. they have many unprofitable customers): – Movie Theaters – Convenience Stores – PayPal 21
Consumer HH Averages Account Group Ratio Average Balance Checking 1.557 $ 5,068 Savings 50.6% $ 6,429 Money Market 3.1% $ 60,654 CD 8.8% $ 26,552 IRA 3.6% $ 17,517 HSA 1.7% $ 2,240 Consumer Loan 6.8% $ 10,411 Line of Credit 1.0% $ 8,737 HELOC 3.6% $ 35,865 Mortgage 6.8% $ 122,547 Business Checking 11.7% $ 16,574 Cross-Sell Balances What is this worth? Total Relationships 2.534 $10,420 x 4.0% = $417 Total Deposits $ 17,969 $ 7,549 x .25% = $19 Total Loan Volume $ 10,420 22
Business “HH” averages Product Ratio Average Balance Business Checking 1.521 $ 22,962 Business Savings 8.4% $ 12,681 Business Money Market 5.3% $ 125,566 Business CD 2.1% $ 50,490 Business Loan 14.9% $ 142,853 Business Line of Credit 5.8% $ 56,917 Business Real Estate 9.8% $ 463,455 Retail Checking 84.5% $ 8,852 Retail Savings 43.5% $ 7,113 Retail Money Market 5.0% $ 91,811 Retail CD 7.2% $ 30,001 Retail IRA 3.3% $ 14,148 Retail HSA 2.3% $ 2,650 Retail Consumer Loan 7.1% $ 16,045 Retail Line of Credit 6.0% $ 7,144 Retail HELOC 3.8% $ 43,064 Retail Mortgage 8.5% $ 170,382 Total Relationships 3.696 What is this worth? Total Business Deposits $ 43,705 $70,005 x 4.0% = $2,800 Total Business Loan Volume $ 70,005 Total Business & Retail Deps $ 61,558 Total Business & Retail Loans $ 87,691 23
Fee Revenue • NSFs: ~$100/account on average, net of chargeoffs • Interchange income: ~$50 on average in net interchange income 24
Marginal Revenue • Balances (assuming you can get the Haberfeld Client averages for loans/HH): $400+ • Fee Revenue: $150 • Annual Marginal Revenue: $550 • …and they stay for an average of > 8 years! 25
Marginal costs are pretty low • So you add one more PFI customer: – Issue a debit card – Send a statement (perhaps) – A little more data processing – Write off a little principal from overdrafts on some • Our client average direct marginal costs are about $30-$40/customer/year 26
Net Present Value of the Relationship Retail: $2,902 Business: $10,353 27
The high-level math • The typical bank spends about $200 to get a new customer (one more than they were getting at “steady rate”) • The average customer produces > $300/year in marginal value (conservatively, in my opinion) • They will stay for an average of > 8 years • An average customer is worth in excess of $2,000 over their lifetime • You have tremendous excess capacity • If you get a lot more of them, fee income goes up, and you haven't raised your fees 28
Expanding Market Share You have to steal from the other guys 29
My Opinion • Bankers will spend money for acquisitions and to build new branches in order to grow… • But they severely under-invest in marketing to fill up the branches they already have. • Most community banks can DOUBLE the number of new customers they are attacting! • …and do it in a very profitable way. 30
First, become the PFI • You are the Primary Financial Institution when a customer gives your name in response to the question: “Where do you bank?” • To do that, you have to capture their primary operating checking account • Once you get that, you own the PFI relationship • They are now available to buy loans, other deposit products and produce fee income 31
Stealing from the BIGs 32
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Convenience is still #1 34
How do you find prospects that will find you convenient? • Demonstrated Convenience – They are the neighbors of the customers you already have – They live around your branches • Predicted Convenience – use of cell phone and GPS data – They work around your branches – They drive by your branches – They walk, shop or eat nearby your branches with regularity 35
DRIVE MORE TRAFFIC: TARGETING MATTERS Demonstrated Convenience Predicted Convenience 36
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Digital targeting is getting better • Always be Testing • In the past, many community banks have tried digital marketing, but the cost of acquisition was not optimal • But, that is potentially changing: – 68% of all electronic ads served today have location-based data associated with them – No longer “spraying” • Geo-fencing • IP Matching 39
Good Checking Product • What do people want? • Simple, low or no hurdles, no cost • KISS, KISS, KISS • Pride in product at the front line is a MUST! • Complexity creates barriers • Question: can you make money offering this? 40
4 dynamics to effective marketing for PFI Customer growth 1. The Market is fixed – you have to steal market share and that should cause a change in approach. 2. You can’t get anyone to switch, so don’t try. Do something subtly, but profoundly, different. 3. You will generally get what your branch will give you in terms of customer profile. 4. Policies and Process really matter. 41
Dynamic #1: The Market is Fixed 42
Dynamic #1: The Market is Fixed 43
In a Fixed Market… • In a given year, about 10% - 15% of the households “change banks”. • When you start getting new customers, by definition, your competition is getting fewer. • We call the system net zero — when FIs are trading households back and forth 44
The good news! A fixed market is an infinite “pipeline” of opportunity
Dynamic #2: You can’t get anyone to switch But, you can do something different that will have a huge impact on results…and this will drive the approach and timing of your marketing. 46
“Changing Banks ” • Switching is really, really hard • People only do it if they have to • Certain events beyond our control create the opportunity, you rarely get people to switch, it’s just too hard • Be there when they decide to switch • Set the right conditions for them to notice and pick you! 47
Why do people change banks? • Mad at the old bank (70%) • Moved • Changed Jobs • Got married • Got divorced • Changed bookkeeper • It is almost all event driven… 48
When do people change banks? • When they have money • When do they have money? – When they get paid • When do people get paid? – Weekly or bi-monthly • About every 6 weeks you get a double-whammy payday 49
Dynamic #3: You generally will get what your branch will give you And they aren’t the dregs of society 50
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